The escalation of tension in the Middle East also has consequences for the economy of Israel and Iran. In addition, the price of oil in the international markets is affected. Just hours after Iran’s first attack on Israel, the price of oil rose sharply on Wednesday morning. Both North Sea Brent crude and US WTI (West Texas Intermediate) rose 1.5% to $74.74 and $71.04 a barrel, respectively. On Tuesday it was preceded by another increase of 2.5%.

Israeli Prime Minister Benjamin Netanyahu has made it clear from the start that one of the targets for possible retaliation is Iran’s oil industry. According to estimates by Capital Economics, “Iran contributes 4% to the world’s oil supply. Should Iranian oil disappear, the big question is whether Saudi Arabia will increase its own production” to make up the gap.

Oil is an important source of income for Tehran. Despite US sanctions, Iran continues to export, particularly to China. In fact, according to the Iranian Minister of Oil, Javad Ouji, in 2023 the revenue from exports of “black gold” exceeded 35 billion dollars. Vortexa analysts believe that in the first five months of 2024, Iran has increased its exports, reaching 1.56 million barrels per day.

This is due to a possible increase in production, enhanced demand from China, but also the expansion of the “shadow fleet”, which makes it easier for Tehran to circumvent sanctions. According to estimates by the American organization United Against Nuclear Iran (UANI), this “shadow fleet” now numbers 383 ships. On top of that, Iranian oil is available at a 20% discount to the official price on international markets, London-based Iran International TV reports. In this way, Tehran “buys” the client’s risk of facing future problems due to US sanctions. According to Iran International, the best customer for illicit Iranian exports is China’s state-owned refineries, but before Iranian oil reaches its destination, middlemen mix it with other quantities of oil, then declare it to China as a third-country commodity. , for example from Singapore.

Sanctions and inflation

The sanctions are not only affecting the oil industry, but have also cut off Tehran from the international banking system. The result was the collapse of the national currency, the rial. Today, Iranians are forced to pay on the black market 580,000 rials for one dollar, while in 2015, after the signing of the agreement on Tehran’s nuclear program, the exchange rate was one dollar to 32,000 rials. The expected consequence is the rise in inflation, which now reaches 40%.

Even if oil exports increase, Iran cannot be considered a strong “player” in the world economy. It has a population almost ten times that of Israel, yet the Gross National Product (GDP) of the country does not exceed 403 billion dollars, compared to 503 billion of Israel. Iran’s GDP per capita does not exceed $4,663, while Israel’s reaches $52,219, according to data from the International Monetary Fund (IMF).

The worsening economic situation for the middle class in Iran is particularly noticeable. As Javad Salehi Isfahani, professor of economics at the American Virginia Tech University, points out to DW, “because of the sanctions, the standard of living is back to what it was 20 years ago.”

Iran: Opacity and corruption

In addition, a lot of money disappears into the opaque power structures of the Shia leaders in Tehran. According to Transparency International’s Corruption Perceptions Index, Iran ranks 149th out of 180 countries. Extremely opaque is the role of the “Revolutionary Guards” and religious institutions, which control key sectors of the economy. They are not required to pay taxes or publish balance sheets. They report directly to the country’s supreme religious leader, Ali Khamenei.

The regime tries to impose a rudimentary “social peace” by handing out subsidies on food, fuel and other basic necessities. Despite his authoritarian nature, he seems to be calculating and afraid of people’s reactions. Every now and then protests break out in Iran, sometimes due to the constant increases in food, sometimes against the mandatory headscarf for women.

A sustained war with Israel would be a huge economic burden for Tehran. As a result, the Iranian leadership would be forced to save money from elsewhere to finance war operations, which would further exacerbate popular discontent.

Edited by: Yiannis Papadimitriou